Lesson 3 of 7
Choosing the window
Cisco's ten-year average operating margin is 25.18 percent, the last five average 24.23 and the first five 26.13. Defending the window is part of the answer.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Averaging is the standard answer to a cyclical year, and the average is only as good as the window it covers.
- Cisco's ten filed years average 25.18 percent operating margin; the first five average 26.13 and the last five 24.23.
- A window has to be defended on business grounds, not chosen because it produces a comfortable number, and the defence is written down with the figure.
Graham's answer to a single distorted year, in chapter 12, was to average several. The instruction is right and incomplete: it does not say how many, and the number you pick is itself an assumption with a large effect.
Three windows on the same ten years
- Ten-year average, FY2017 to FY202625.18%
- First five, FY2017 to FY202126.13%
- Last five, FY2022 to FY202624.23%
- Latest single year, FY202624.27%
- Lowest year, FY202520.76%
- Highest year, FY202027.63%
What the windows do to the answer
Applied to fiscal 2026 revenue of 63,325 million dollars, the ten-year average margin gives operating income of about 15,945 million, the last five give about 15,344 million, and the first five give about 16,547 million.
That is a range of about 1.2 billion dollars produced by nothing but the length of the average. The single-year figures are wider still: the lowest and highest years give 13,146 million and 17,497 million.
Three ways to defend a window, only one of which is good
The bad defence is arithmetic convenience: ten is a round number and the data goes back ten years. The record going back ten years is a fact about a filing archive, not about the business.
The weak defence is convention: multiples are often quoted on three-year or five-year averages. Convention is a reason to state what you did, not a reason to do it.
The good defence names an event. A window should cover at least one full turn of whatever drives the business, and it should either exclude a structural break or explicitly straddle it and say so. For Cisco the obvious break is the acquisition completed on 18 March 2024, which added a business to the group part-way through fiscal 2024. A window of fiscal 2017 to 2023 describes one company; fiscal 2025 to 2026 describes another; a ten-year window describes both and has to say which.
The rule that follows
State the window with the figure, every time, in the same sentence. A normalised margin of 25.18 percent is a number. A normalised margin of 25.18 percent, being the average of operating income over revenue for the ten fiscal years 2017 to 2026 as reported, is a claim somebody can check and disagree with.
What averaging cannot fix
A structural change. If the business is materially different from the one that produced the early years of the window, the average is a blend of two things and describes neither. Averaging is a treatment for volatility around a stable mean, and where the mean itself has moved, the honest response is a shorter window and a shorter list of years you claim to be describing.
Check yourself
What is Cisco's average operating margin across the ten fiscal years 2017 to 2026?
- 20.76 percent
- 25.18 percent, against 26.13 for the first five years and 24.23 for the last five
- 27.63 percent
Show the answer
Answer: B.
The ten filed years average 25.18 percent, and splitting the decade in half moves the figure by about 1.9 percentage points.Which is the good reason to choose a particular window?
- It is the length of the archive available
- It matches what most analysts use
- It covers at least one full turn of what drives the business, and it either excludes a structural break or straddles it explicitly
Show the answer
Answer: C.
The archive length is a fact about filings and convention is a reason to disclose rather than to choose. A window is defended on the business it is describing.What can averaging not fix?
- A single unusually bad year
- Seasonality inside a fiscal year
- A structural change in the business, where the average blends two different companies
Show the answer
Answer: C.
Averaging treats variation around a stable mean. Where the mean itself has moved, a longer window makes the figure less descriptive, not more.Sources
- Cisco Systems, Inc., annual reports on Form 10-K for fiscal years 2017 through 2026: operating income and total revenue as reported.
- Graham, The Intelligent Investor, revised edition 1973, chapter 12, on averaging several years of earnings rather than relying on one reported year.
What this leaves out
- Every margin here is this course's arithmetic on two reported lines, with no adjustment applied. The adjustments arrive in the lessons that follow.
- Averages are unweighted means of annual margins, not revenue-weighted, which is a choice and changes the figure slightly.
- Cisco's fiscal year ends in late July, so a year labelled here does not line up with a December year end elsewhere.
- Nothing here is a view on Cisco or on any security.